The antitrust exemption contained in the proposed tobacco settlement is unacceptably broad, Federal Trade Commission Chairman Robert Pitofsky said today as he presented Commission testimony before the Senate Judiciary Subcommittee on Antitrust. Pitofsky testified about the antitrust immunity sought by the tobacco industry as well as the competitive and economic implications of the settlement. The Commission's concerns, Pitofsky said, are "whether antitrust immunity will lead to prices and industry profits that are even higher than contemplated, and, more broadly, whether immunity is really necessary to achieve the purposes of the settlement."

On September 22, the FTC released a staff report that demonstrated that industry profits could rise substantially, in part because of this antitrust exemption. Approximately two-thirds of any additional revenues generated as a result of increased coordination among the industry would go to the cigarette manufacturers as excess profits, the report says. In the testimony, the Commission also stated that if a cigarette price increase larger than now contemplated by the settlement is sought to reduce underage smoking, it is appropriate to consider whether such a price increase could better be achieved by increasing the payments tobacco companies must make, for example, rather than "permitting collusive arrangements among the manufacturers that will allow them to reap the excess profits resulting from those higher prices."

The FTC's testimony examines three reasons why the tobacco manufacturers may believe they need the proposed immunity provision and concludes that a potential need for antitrust immunity exists for only one area of concern:

(1) Collaboration on the Pass-Through of Annual Payment Amounts

According to the FTC, the manufacturers have suggested they may need to discuss and agree on issues relating to the pass-through of the annual payments contemplated in the agreement. Pitofsky explained that history, economic logic and common sense demonstrate that such discussions would be unnecessary because manufacturers can comply individually with this requirement. "Moreover, as currently worded, the proposed immunity provision could be construed to permit agreements that go even beyond an agreement to pass on the [a]nnual [p]ayment amounts," the Chairman said. He added this could result in price increases that substantially exceed the per-unit cost of the payments.

(2) Collaboration on Marketing and Advertising Restriction

A second argument for an antitrust exemption, Pitofsky said, relates to certain marketing or advertising restrictions that may have to be implemented by agreement among the manufacturers. Again, such an agreement should not be necessary, he argued, as these restrictions could be embodied in legislation requiring each manufacturer to comply unilaterally.

However, the Chairman did point out that such legislation could be challenged as a violation of the First Amendment guarantee of freedom of expression. If such a challenge were to be successful there no longer would be a legal obligation for the companies to restrict their advertising or marketing. In that event, it may be necessary for the manufacturers to implement restrictions by private agreement, Pitofsky said.

"The Commission believes the call for antitrust immunity is premature," the testimony says. "[O]ne question that must be examined more closely is whether the embodiment of the marketing and advertising restrictions in state and possibly federal consent decrees might obviate the need for an antitrust exemption. If an antitrust exemption is deemed appropriate, it should be drafted very narrowly so that (1) it is limited to an agreement to comply with the marketing and advertising provision of the statute as if they were still in effect, and (2) it would take effect only in the event of a successful First Amendment challenge."

(3) Joint Action to Address Problems with Uncooperative Retailers

The Commission said that a third reason the manufacturers may need antitrust immunity is "to join forces to deal with retailers that undermine the manufacturers' efforts to reduce underage smoking." Again, Pitofsky stated that this is a hypothetical problem. Proposed legislation could contain incentives for manufacturers to respond individually to non-complying retailers and "would provide additional mechanisms for enforcement by a state if a retailer fails adequately to control sales to minors."

The FTC testimony goes on to discuss additional economic concerns addressed by the Commission's staff report, which is part of an ongoing examination of the potential economic impact of the proposed settlement. In particular, the Chairman pointed to the industry's analysis that takes issue with many of the conclusions of the report. The Commission observed that, according to FTC staff, one major reason for differences between the FTC staff report and industry figures is the treatment of inflation.

"To summarize," the testimony says, "there will continue to be vigorous debate on the potential economic impact of the proposed settlement. Based upon the history and structure of the tobacco industry and several features of the settlement -- most importantly, the inclusion of a broad antitrust exemption which, as presently drafted, could allow the tobacco companies to coordinate future price increases -- it is not unreasonable to expect cigarette prices to rise more than the amount of the annual payments, resulting in additional revenues to the tobacco companies. The Commission believes a broad antitrust exemption would significantly enhance coordination in the tobacco industry and is not justifiable."

The Commission's vote to authorize the testimony was 4-0.

Copies of the Commission's testimony as well as the staff report are available from the FTC's World Wide Web site at http:www.ftc.gov and from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC's NewsPhone at 202-326-2710.